Thursday, 4 March 2010

Nanny State...

Nanny state's pension plan is bitter pill for most of us...

NANNY Hanafin, assisted by the two Bossy Brians, was in full swing yesterday. Work for longer, get less tax relief and, by the way, if you are not in a pension we are going to sign you up for one whether you like it or not.

Yes, the 'Nanny State' knows what is good for us and was not shy about telling us yesterday.

Taoiseach Brian Cowen, Finance Minister Brian Lenihan and Minister for Social and Family Affairs Mary Hanafin, have decided many of us have been naughty, not nice.

So they have prescribed a full dose of pension punishment for all. Naughty workers who failed to take out a pension when the boom was in full flow will now be automatically signed up for one.

This measure will not impact on those who are already in an occupational pension scheme and those in the public sector.

All workers under the age of 62 will have to work for longer. Those under the age of 49 will end up having to wait until they are 68 before they qualify for a state pension.

Anyone currently in receipt of a pension will not be affected by the Government's new National Pensions Framework.

But for millions of others the changes announced yesterday amounted to nothing short of a pensions revolution.

However, it is a revolution few workers will welcome.

Private sector employers who are already in a pension are likely to see their employer raise the retirement age in line with the changes being announced by the Government.

The moving of the state retirement age from 65 to 68 is in line with international developments, but it is still set to come as a massive shock to thousands of workers who have mentally prepared to get out of the workforce at age 65.

How will a brickie keep laying blocks at the age of 68? Do we really want our highly charged adolescents being taught by a worn-out 67 year old?

And how will a nurse cope with still having to lift patients out of bed when they are well into their 60s?

For people in private sector pensions there is little cheer either.

The pensions framework document sets out how they will get less tax relief on their pension contributions.

From 2014, instead of being able to get tax relief at 41pc the tax relief will be cut to 33pc.

This is good for those on the lower tax rate of 20pc, but for higher-rate taxpayers it will effectively mean a pay cut, if they want to maintain the same level of pension contributions.

This is how it works. At the moment a PAYE worker in a private pension scheme who pays tax at the 41pc tax rate can claim tax relief at 41pc, and also claim relief on PRSI (4pc) and the health levy (between 4pc and 5pc).

This means that it costs €51 for every €100 of pension money.

At the moment, those paying tax at 20pc get tax relief at that rate, plus relief on PRSI and the health levy.

But by 2014 the tax reliefs for everyone will be 33pc, plus relief on PRSI and the health levy. This means it will now cost a higher-rate taxpayer €59 for every €100 of pension pot.

The only positive is that the gradual change in the retirement age from 65 to 68 should ease the deficits in the majority of defined-benefit pension funds as there will be more time for workers and employers to pay into the schemes and eat into the deficits.

The other hugely radical move is the introduction of private pensions for all.

Anyone who is not already in a pension will have to join one.

FROM 2014, workers aged over 22 earning above a certain income threshold (probably €18,000) will automatically be enrolled in a new supplementary pension scheme to provide additional retirement income.

Employees would contribute 4pc, with the Government and the employer providing matching contributions of 2pc each -- making a total contribution of 8pc.

Workers may opt out of the supplementary scheme, but they will be enrolled into it again every two years.

This will force them to keep signing themselves out of it if they do not want to remain in.

If someone stays in the scheme then it is mandatory for employers.

It will not be an option for people in this new auto-enrollment scheme to get their money out before they retire.

The scheme is expected to apply to those earning less than €50,000 who are not in a pension, but that figure is not finally agreed on yet.

There were accusations from Fine Gael yesterday that the new system would be a boom for investment companies, as private pensions providers would have to tender to provide a range of pension fund options for those enrolled into the new scheme.

This is despite the fact that pension funds have a dreadful reputation right now. They impose high charges despite some of the worst returns in the Western world in the past few years.

The ministers committed yesterday to making sure that the state pension would remain the basis of the pension system in Ireland, with the Government undertaking to preserve its value at 35pc of average earnings. It remains to be seen if that promise will be kept by our Nanny State.

Report by Charlie Weston - Irish Independent

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